State Bank of India to Stop Teasing

Late Wednesday, State Bank of India announced that it is pulling the plug on its so-called teaser home loans offer, which has been a bone of contention between the lender and the Reserve Bank of India for more than a year.

Analysts say the withdrawal of the scheme is a much-needed attempt to fortify interest margins in a rising interest rate cycle and will also placate a peeved banking regulator.

The scheme—widely seen as a pet project of SBI’s outgoing chairman O.P. Bhatt—charged borrowers a lower fixed rate for the initial tenure of mortgages. The rate would eventually reset to a floating rate.

The RBI is opposed to teaser loans because it says borrowers may find it difficult to service loans once the interest rates are set higher later.

Analysts say SBI has been chasing loan book growth at the expense of margins for too long, despite easily being the largest bank in the country.

“Banks with lower CASA (current account-savings account) ratios have higher interest margins and the withdrawal of the scheme and the lending rate increases are positive for the bank’s margin outlook,” said Vaibhav Agrawal, vice president at Mumbai-based Angel Broking.

A higher proportion of low-cost CASA deposits typically translates into higher interest margins as it reduces the average interest cost of deposits for banks.

Late Tuesday, SBI increased its two benchmark lending rates by 0.25 percentage point, bringing them more in line with peers. Analysts see this as another move to improve interest margins.

The teaser loans scheme, which helped SBI wrest market share from home loans behemoth Housing Development Finance Corp. Ltd., had become a thorn in the bank’s side in recent months.

In November last year, the RBI increased the provisioning requirement for teaser loans by five times, saying the loans are more prone to default as they reset to higher floating rates. As a result, banks would have to set aside more capital for teaser loans to cover the risk of default.

SBI will have to make an additional provision of 5.87 billion rupees ($132.6 million) for teaser loans, shaving off that amount from its profit.

SBI chairman Pratip Chaudhari, who took over earlier this month, said Wednesday the bank is in talks with the RBI over provisioning for the existing loans under the scheme and hopes the regulatory prescription will be “pragmatic.”

“That product [teaser loans] was good but it was not compliant…regulatory compliance is also important,” he told reporters at a press conference.